Competition Assessment of the Indian Pharmaceuticals Sector

Aditya Bhattacharjea Fiyanshu Sindhwani

Centre for Development Economics,Delhi School of Economics

Structure of the reportIntroduction

◦ Importance of drug availability and pricing in India◦ Special features of the market for medicines

Evolution of the policy regimeEmpirical analysis of market structureCompetition lawDrug price controlForeign direct investment—takeovers TRIPS and patent protectionPublic production, procurement and

distributionCompetition assessment checklist

Evolution of policy regime1970: Patents Act and DPCO1973 FERARestrictive trade policyMRTP Act

Progressive relaxation of all the above from 1990s

Analysis of Market StructureFor pharma firms in Prowess, Price-cost margin, CR4

and HHI all show decline since around 2003Sharp decrease in ‘entry’ of new firms, significant

increase in ‘exit’ large decrease in net entryAggregate import penetration has risenBut competition takes place at the level of

therapeutic segments or individual drugsCalculations for 9 specific dosages of individual drugs

show much higher concentration, increasing between 2005 and 2010 for some of them (CR4 is >90% for 500mg calcium tablets and 40mg insulin injections).

Need to look at firms’ practices. Branding of generics allows differentiation, marketing and coexistance of high prices with high market shares.

Structure-conduct-performance analysisCarried out for 610 pharma firms in Prowess, 1990-2010. Results contrary to expectations: Coefficients for market structure and MS-squared

are insignificantFor log (assets) it is negative and significant

larger firms have lower PCMCoefficients for R&D intensity and advertising

intensity are negative and significant. These raise costs today but effects are felt later?

Dummies for TRIPS periods are positive and significant

Competition lawIneffectiveness of MRTP ActReview of all pharma-related cases

decided till now under Competition Act◦Two cases of regional chemists’ & druggists’

associations forcing manufacturers to limit number of stockists, restrict bidders for government procurement, and fix trade margins These practices are apparently carried out

nationwide – need for wider inquiry Fine based on association’s turnover grossly

inadequate Fixation of trade margins by NPPA: RPM by govt

mandate?

Merger cases 6 pharma cases decided since June 2011; all were

approved. The ultimate control over the parties in the combination remains the same

before and after the combination (intra-group reorganization). Companies not engaged in similar businesses and no vertical integration

(conglomerate merger). Absence of one of the parties in India in the business of the other party Significant presence of other players (no AAEC) CCI modified non-compete agreement in one instance But we have identified several mergers that were not

screened because the combined assets or turnovers of the firms were below the thresholds specified in the Act, or the assets/turnover of the target was below the threshold specified by the 2011 notification. Case for reviewing thresholds for this sector?

Drug Price ControlReview of debate over transition from

cost-based pricing of 74 drugs under DPCO 1995 to market-based formula for all 348 NLEM drugs in NPPP-2012.◦Weaknesses in arguments on both sides◦Price controls are usually imposed for

natural monopolies where the number of products and producers is few and competition infeasible.

◦Possibility that controlled prices can be used as focal prices for facilitating oligopolistic coordination – parallel with cement case?

Foreign Direct Investment and TakeoversCritical review of Maira Committee Report

◦ Screening by CCI (with extra expertise on health issues) preferable to FIPB.

◦ Case for reducing merger review thresholds – Competition (Amendment) Bill 2012.

Review of debate on role of MNCs◦ Market share of foreign firms has not gone up post-

TRIPS◦ But they are increasingly supplying the market through

imports, esp of high priced patented drugs and also generics

◦ Effects of takeover on R&D inconclusive, but foreign firms overall have much lower R&D intensity

◦ Too early to detect impact of 2008-10 foreign takeovers?

IPR Issues – Impact of TRIPSSome evidence that growth rate of R&D

expenditure and the number of process and product patents filed by leading Indian firms declined after 2005.

R&D for drugs to treat diseases of greatest public health importance (malaria, TB) neglected in favour of ‘lifestyle’ diseases by both Indian and foreign firms.

Encouraging signs of India using TRIPS flexibilities:

Grant of compulsory licenses for Bayer’s Nexavar and now 3 more cancer drugs

Use of 3(d) to deny evergreening patent for minor improvements in Novartis’s Glivec

Public production and procurement In 2008, Health Ministry closed down 3 leading

PSUs on grounds of not complying with GMPs. Reopened in 2010 but production still far below earlier levels govt has to procure vaccines from private producers at much higher prices.

Government procurement rules to ensure GMPs have been struck down by High Courts as excluding competition without adequate justification.

Need to provide assistance to smaller units to comply with GMP and to enforce quality standards under Drugs and Cosmetics Act. This would increase competition for bidding and also weaken industry’s argument against debranding.

THANK YOU!Comments welcome:

aditya@econdse.org